Adviser Q&A: Proposals on the taxation of unapproved share plans

Following on from the report by the Office of Tax Simplification (OTS) on unapproved share plans earlier this year, HMRC has published a consultation document in response. However, even if implemented, the OTS changes on which HMRC is now consulting are likely to have very little impact on most employees’ tax position or the way that HMRC interacts with these plans (unlike parallel changes being made to HMRC approved plans where substantial procedural changes are being proposed). Consequently, the HMRC consultation is as notable for what it does not address as the points it raises.

What is covered in the consultation?

HMRC and HM Treasury are consulting on a number of recommendations in the OTS report, including:

• exempting option and share for share exchanges from income tax and NIC in all situations. Currently, legislation only specifically prevents an income tax and NIC charge arising where share options are exchanged, but there is no exemption for the exchange of restricted, partly-paid or nil-paid shares, which can be problematic in private companies with these arrangements;
• extending the availability of corporation tax relief for the exercise of options and other employee share acquisitions in a company up to 90 days following a sale of the company. This will help AIM and private companies where relief is currently lost immediately when they are taken over;
• simplifying the taxation of share gains for internationally mobile employees by aligning the tax and NIC treatment of the share awards of international assignees with their cash remuneration, as well as aligning the corporation tax deduction rules (inevitably, there will be winners and losers here, because there are some arrangements which are currently not taxed at all that are bound to be brought into the UK tax system); and
• valuing listed shares using the closing price, rather than using the quarter up valuation methodology as is currently the case. Whilst simpler, the government notes that in some cases this may produce a higher value for tax purposes, and it is seeking comments on this.

Which OTS proposals have been omitted from the consultation?

The government has chosen not yet to consult on the two key OTS recommendations, which relate to the concepts of a marketable security and an employee shareholding vehicle. This is disappointing, as these were arguably the two most revolutionary proposals which would have made real changes for private company employee share ownership.

The marketable security idea is designed to change the point at which tax can become chargeable on employee shares in private companies, so that income tax and NIC would only be payable when the securities become marketable or are sold (whichever is the sooner).

The employee shareholding vehicle concept, which essentially concerns employee benefit trusts holding shares, is designed to allow private companies to manage employee share arrangements and create a market for shares without many of the current problems. Those looking for early solutions to get round loans to participator issues and the need to have more expensive offshore trusts to avoid capital gains tax liabilities will be disappointed.

HMRC says it will assess the potential cost and further explore the anti-abuse safeguards that would be necessary before deciding on whether to proceed with legislation on these points in 2015. It is not yet clear whether this represents genuine enthusiasm for these ideas tempered with caution, or these ideas being put on a back burner before being dismissed into the political wilderness.

What are the proposals in relation to the section 222 charge?

In cases where an employee fails to make good to his employer a PAYE charge within 90 days of that liability arising, a further income tax and NIC charge arises on the outstanding amount (commonly referred to as a ‘section 222 charge’). The government is consulting on the second OTS proposal here, which is to extend the deadline for an employee to make good outstanding amounts to their employer from 90 days to 6 July following the end of the relevant tax year in which the PAYE arises. Whilst this second alternative proposal, if implemented, would provide some extra leeway to employees, it is disappointing that the government has not taken the opportunity to take forward the main OTS proposal, which was to abolish the section 222 charge altogether for employment-related securities. The section 222 charge is widely considered to be penal. Often, there has been no intention or desire to confer any benefit on employees, and it is simply a mistake that the charge has not been paid in full.

What happens now?

The consultation period runs until 16 August 2013, with the government’s initial response being published in autumn 2013. Any legislative changes are expected to be implemented in 2014.

As mentioned above, it is a pity that the concepts of a marketable security and an employee shareholding vehicle proposed by the OTS are not being progressed further by the government as a matter of priority this year, as they would represent real developments which would lead to significantly greater employee share ownership in private companies.